Look At What’s Coming
Look At What’s Coming
by Gary Ferrulli
2016 was a year of shake ups; mergers, buy outs and a failure. And then announcements of new Alliance formations and the concomitant service changes coming in 2017 and 2018.
But 2017 has had two announcements already that are more than interesting, one I think is a true game changer. The relatively smaller impact one is that OOCL may be for sale with Cosco, Evergreen, China Merchants and CMA picked by pundits as the likely buyer. OOCL executives in Hong Kong had only “it’s all speculation” to say about it, and we should take their word on that. It’s not a denial nor an affirmation. To some, there is logic to it from a pure business perspective. OOCL grew from a virtual tramp service in the 1970’s to a high-level service provider who consistently made money in the 2000’s, an era when most were floundering. A tribute to the management of the company headed by the venerable Tung family. But even with the success, they were in an awkward position first as a member of the G6 where they knew that mega ships were required for the Asia/Europe markets yet had little help from their G6 partners, absent MOL. Together they ordered a total of 12 x 20,000+ teu ships, the other 4 members abstaining. Then the sale of APL, the announced new Alliance line ups and the Japanese merge. They find themselves again in an awkward position as the fourth in an Alliance of four as when all is said and done with delivery of what is on the order books, they will have only 11% of the capacity of the Ocean Alliance. And that is before the blockbuster announcement of what China is doing with Cosco.
Some might look at this and say “aren’t they lucky, they are in an Alliance with CMA and Cosco who have now and will have more mega ships for a low-cost operation and scale”. But how will that play out for them with only an 11% share of that capacity now, and far less if Cosco expands with the Chinese government pouring in $26. Billion over 5 years. Looked at from an industry standpoint, after the delivery of the 6 new mega vessels they will have slightly over 700,000 teu’s in capacity and be 8th globally in size, but one-sixth the size of Maersk Line. Not a comfortable position for someone who might want to be a global player.
But it is the announcement by the Chinese government saying that they are going to invest $26. Billion into Cosco over the next five years, that is the true game changer. While no details were included, and Cosco is far more than a container carrier, China’s view of the oceans I think are characterized by what they are doing in the South China Sea, trying to rule it. I’ll speculate here and say they are doing the same with their “commercial navy”, looking for a dominant role on the global scene. Let me speculate further; they now have 6 of the top 10 ports in the world due to their manufacturing power, Cosco is 4th in the world in container capacity about half the size of Maersk. They are going to spend $5.2 Billion a year on average for the next 5 years. Take half of that each year, $2.6 Billion and divide by $150 Million, the cost of a 20,000 teu ship today, and that is 17, and couldn’t they get a discount from a Chinese yard for that large of an order to make it an even 20? That’s 400 hundred thousand teus a year additional capacity. The math boggles the mind of those who understand the implications here, they can vault into first place in 5 years. And it doesn’t require making a dime from the operations or business. Is that their goal? Back to speculation, besides them, who knows?
I’ve watched China grow from a very impoverished nation to a global financial and manufacturing power in less than 40 years, taking seven hundred to eight hundred million people from poverty to at least middle class status. They have a long way to go for the other six hundred million, but it does take time and money. Before they had the time, now they have the money, the time line will shorten and I think that dominance on the oceans is exactly what they want to strengthen their overall influence in the world.
For those container carriers who are on the cusp, struggling to hang on until the global volumes catch up to the capacity, you may be in for a huge shock that will have you going the way of the former US Flag carriers, the South American carriers and many others over my 44+ year career. For those shippers who want more and more options, it won’t be a happy ending for you either.
